Domestic tourism industry: escalating credit risk

The economic turmoil in Europe has taken its toll on tourist arrivals. Statistics for the period of January- August 2012 are portraying a gloomy outlook for the tourism sector for the current year. Tourist arrivals stagnated at 609,215 for the first 8 months of 2012 driven by the adverse outlook and slowdown in our main source destinations. As a result, the Central Statistics Office has reviewed its forecast of 980,000 tourist arrivals for the year 2012 to 960,000, representing a decrease of 0.5% yoy over the figure of 964,642 in 2011. Our forecast for the year is close to the CSO figure and stands around 959,000 tourists (representing a drop of 0.6% yoy).

… mired with towering downside risks…

The outlook for the domestic tourism sector 2012 is likely to be adversely affected by the following downside risks:

• Further economic slowdown in European economies and the dependence of our domestic market on this region 
• The weakening of the Euro vis-à-vis the Mauritian rupee implying lower revenues for the sector 
• Increased regional competition especially with Maldives, Seychelles and Sri Lanka
• Lower investment in the domestic tourism industry 
• Declining risk appetite of domestic commercial banks regarding tourism-sector related projects due to higher credit risk 
• Sustainability of the high debt levels for the main hotel groups 
• Excess room supply

…contributing to higher credit risk associated with market players…

In general, the credit risk level associated with market players is escalating day-by-day and a radical change in the trend is not expected soon especially with the dismal outlook for the year. A large number of stakeholders have over recent years (especially prior to the 2008 financial crisis) contracted financing for expansion projects. With drastic declines in profitability, interest-bearing debt to equity ratio is on the high side and is close to or greater than 1 time.

On average, this financial leverage ratio is deteriorating for most businesses in this industry causing the general Insolvency Risk of this sector to be Moderate (previously Low). Waning operating profit of these firms and soaring debt-servicing pressures, have contributed to fuel alarming drops in the interest cover ratio for many tourism- related businesses, thus causing upward pressures on the Insolvency Risk parameter. However, the high level of non-current assets (especially land and buildings) provides some reasonable degree of comfort regarding this financial element. In addition, many tourism- oriented businesses have reviewed their business strategies and have engaged in debt re-structuring to alleviate these pressures.

On the other hand, lower revenues due to a weak Euro, slowdown in tourist arrivals and degradation in the payment behaviour of international tour operators have negatively impacted on the general Default Risk of the domestic tourism sector actors. Many hotels and other tourism-based businesses like restaurants are mired in a liquidity trap stemming from sharp drops in margins as well as high finance costs and reduced access to finance with reduced risk appetite of banks/ other financial institutions.

...who are at risk regarding international tour operators...

A significant proportion (80%- 90%) of the revenue of hotels in Mauritius is sourced from international tour operators. However, the crisis has re-engineered the dynamics of international tourism and even previously highly regarded/reputable players are facing financial difficulties. In December 2011, the world’s oldest tour operator, Thomas Cook, announced losses of £398 million following the release of financial results for the year ended September 30th. As a result of the losses Thomas Cook engaged in a restructuring programme and confirmed it would close 200 stores in the United Kingdom over the next two years - 125 more than previously announced. The company was also facing liquidity issues and revealed also that it was in talks with its creditors.

...increasing relevance of credit insurance...

The international tourism industry’s soaring volatility calls more and more for credit insurance as a solution to safeguard businesses against unforeseen financial distress of their debtors. Credit insurance provides cover to businesses against non-payment of debts owed to them by business customers for goods or services provided on credit terms. Not only does credit insurance offers the advantage of protecting the company’s cash flow, but also the product can be used as an additional security assigned in favour of banks/other financial institutions to obtain financing (2 crucial benefits in the current economic context).

Credit Guarantee Insurance Co. Ltd (the first and only domestic credit insurer) has over the past 3 years significantly contributed to bolster awareness of this risk management tool among the local stakeholders. The 2 main shareholders of CGI are Prudence Holding Ltd and The Mauritius Commercial Bank while Atradius (2nd world largest credit insurer) act as the main technical partner for the company.

Conclusion

The domestic tourism sector is currently facing daunting challenges from both internal and external factors pinning down the recovery. The industry, which was known to be robust and resilient, is nowadays quite fragile and at the mercy of international drivers like the economic performance of main source markets and the financial health of the international tour operators. Re-thinking the existing industry model (which has certainly generated positive results in the past, but alas gradually losing pace and alarmingly starting to lose breath) would be the way for our flagship sector to navigate safely out of the storm!